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Some investors turn to gaming stocks because of their defensive qualities. The digital age has ushered in a subset of gaming stocks whose business models include high-tech gaming equipment and software and internet access platforms for gamblers.  

So we will skip the big name casino operators and focus instead on some names that incorporate technological innovation and internet access.  Here are six stocks to consider, listed by 52 week percentage share price gain:

Self-proclaimed electronic gaming system specialist eBet Limited (EBT) has the smallest market cap and lowest dividend yield of any share in the table, but based on price action alone, it appears to have the hottest hand right now.  The current share price of $3.37 is substantially above its 52 Week Low and close to the 52 Week High.  The upward momentum in share price remains intact, despite a slow start for the ASX in early 2014.  In fact, over the past month, EBT has had multiple positive news items and the share price is up more than 18% over the month. 

Here is the chart:

eBet may be small in size but the company’s business spans the globe, with operations and partnership arrangements from the Asia Pacific region to the United States.  The company offers gaming “solutions” for gambling venue operators as well as for players, with sophisticated machines and software for the players and operational and maintenance support systems for the venue operators.  

EBT’s Half Year 2014 results were reported in February with a 2% increase in revenue and a 32% increase in net profit after tax (NPAT).  In March the company acquired CDOL1, a provider of business intelligence technology to the gaming and hospitality industry.  

Since gambling is a regulated activity, all gaming stocks are subject to regulatory approvals, and the inherent risk of regulatory changes.  In April eBet received the necessary approvals to begin offering its products and services to licensed venues in Victoria.  Consensus analyst opinion for EBT for the current month is Overweight, according to the WSJ.  

While eBet saw the largest percentage share price gain year over year, the only other small cap stock in our table, online lottery ticket provider Jumbo Interactive (JIN) fared the worst, dropping 40%, with no trend reversal in the offing as the share price is down 25% over the past month.   

Jumbo began selling lottery tickets online in Australia back in 2000 but it was a landmark ruling in the US allowing internet sales of lottery tickets there that got the attention of investors.  Jumbo was quick to announce it had representatives in the US looking for contracts.  Here is a five year price movement chart showing what happened:

Despite its recent troubles, JIN is up 400% over five years and about 5% over two years.  Jumbo’s global expansion ambitions have provided much of the impetus for share price movement both up and down.  The announcement of a 50/50 Joint Venture in the US and an upcoming lottery website in Mexico thrilled the market, as did later news of expansion into Germany.  In addition, Jumbo entered into an agreement with another company in our table, Australia lottery and gambling services provider Tatts Group Limited (TTS), allowing Jumbo access to Tatts’ Northern Territories operation.  While the German expansion is now operational and the Tatts arrangement still in place, the Mexico site died not long ago and the US has yet to live up to its promise.  

Full Year results reported in August 2013 were poor, with a 55% drop in NPAT.  Jumbo’s recently reported Half Year Results showed a 28% decline in revenue and an 8.2% drop in NPAT, over the previous corresponding period.  The German lottery market offers hope for JIN investors as its $11 billion market is approximately twice the size of the Australian lottery market.  Internet lottery sales in Germany currently account for only 1% of total sales, while Australia is already at 8%.  

Jumbo Interactive may have fallen out of favor with investors, but its day in the sun may yet return.  Investors who held JIN for five years have seen an average annualised rate of total shareholder return of over 40%.  Let’s revisit our six companies, this time focusing on a few valuation measures and some current and historical performance measures.  Here is the table:

Bargain hunters should like EBT’s low P/E and P/B ratios along with Tatts Group, to a lesser extent.  Growth investors can point to the outstanding total shareholder returns posted by Ainsworth Game Technology Ltd (AGI) as justification for the somewhat lofty valuation.  In addition, AGI has a 19.5% two year earnings growth forecast and an 11.85% dividend growth forecast, although Ainsworth’s dividend is unfranked.

The company is a game-maker, from the cradle to the grave.  The company designs, builds, sells, and services high-tech electronic games.  In an interesting side note, Ainsworth can trace its origins back to current rival Aristocrat Leisure (ALL), as the founder of Aristocrat moved on following his turning the company over to his family. A ten year price chart for the two companies shows the child outshining the parent.  Here is the chart:

Aristocrat Leisure is more diversified than Ainsworth, offering gaming management systems for casino and other gambling venue operators and has moved into online social gaming.  Both are global in reach.

Ainsworth is smaller than Aristocrat and lacks diversification but is currently the analysts’ choice.  WSJ online shows an Overweight Consensus opinion on AGI, with 4 analysts at Buy; 1 at Overweight; and 1 at Hold.  In sharp contrast, there are 3 Analysts rating ALL at Sell; 2 at Underweight; 3 at Hold; 1 at Overweight; and 3 rating the stock a Buy.

Tabcorp Holdings Ltd (TAH) spun off its casino operations in 2011, creating Echo Entertainment Group (EGP) in order to focus on four operations – Keno, Wagering, Gaming Services, and Media and International.   With the exception of its Sky Racing Television channels that broadcast thoroughbred and greyhound racing as well as other sporting events here and around the world, TAH operates in Australia exclusively.  The company operates around 6,000 Keno terminals across Australia and offers betting on racing and sporting events.  The wagering business has multiple distribution channels, including close to 3000 retail outlets, online and mobile access as well as Pay TV.  

On 06 February the company reported Half Year Results showing a 1% increase in revenue and a 2.8% increase in NPAT.  Buried in the Half Year and the Full Year 2013 results released last August is hopeful news for investors.  The company’s online wagering website posted a 40.1% increase in revenues while mobile wagering rose by 43%.  The current consensus analyst rating is Overweight, with 6 Buys, 3 Holds, 3 Underperforms, and 1 Sell.  

Tatts Group Limited (TTS) is the largest and oldest gaming operator in Australia, tracing its roots back to 1891.  The company went public in 2005 and after a quick start out of the gate, the GFC crushed the share price and it has yet to recover.  Here is a chart for TTS since it began trading on the ASX:

Tatts Group has five operating segments serving the needs of gamers and gaming providers; four here in Australia and one in the UK.  In the UK the company operates slot machines and an online gaming website.  One division operating in Australia and New Zealand provides a variety of services for gaming machines, from installation to warehousing to repair and maintenance.  The company offers fixed betting under licenses in Queensland, Tasmania, Northern Territory, South Australia, and Tasmania.  Tatts also offers support services to casino operators, and finally, there is what the company is best known for – lotteries.

Tatts operates lotteries throughout Australia, with the sole exception of Western Australia, under four distinct brands. Add the branding of the other divisions to give Tatts a total of 8 distinct branded offerings.  

Tatts serves as a good example of the risk of regulatory oversight as the company’s Full Year 2013 results were crushed by the loss of a near monopoly license for poker machines in Victoria.  The licenses were held with Tabcorp Holdings and both companies are now suing the Victorian state government.  

The company’s Half Year Results released on 20 February still show declines stemming from the loss of the Victorian business, but from continuing operations the company posted a modest 3.5% decline in revenues and a respectable 12.2% increase in NPAT.  

Despite the regulatory challenges, current and prospective TTS investors have two reasons for optimism.  The first is growth in online operations.  Lottery sales online as a percentage of total sales increased from 7.9% in the Half Year 2013 to 9.2% for 2014 while online wagering increased from 19.1% to 22%.

The second is the company’s new CEO, appointed in September of 2012, assuming the role in January 2013.  Plans to transform the company placed a heavy emphasis on expanding online operations, including a website for wagering.  In addition, a rebranding project was announced.

While the Tatts brands may be considered iconic in their own right, they do not connect to a whole.  Virgin Blue offers an example of what rebranding can do.  The airline we now know as Virgin Australia was at one time operating under a multitude of brands, from Virgin Blue to V Australia, to Polynesian Blue and Pacific Blue.  Time will tell if the rebranding enables Virgin Australia to successfully compete with one of Australia’s most iconic brands – Qantas.

Tatts has hired the same agency that handled the Virgin rebranding to assist in the rebranding of Tatts, which the CEO hinted could be announced in mid-2014.  Current analysis consensus rating on TTS is Hold, with 1 analyst with a Buy Rating; 3 at Overweight; 9 at Hold; and 1 with an Underperform rating.

Click on the links below to read other articles from this week’s newsletter

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The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article.